Stiglitz: Reform or Divorce in Europe

by Melanchthon Tue Aug 23rd, 2016 at 02:45:51 PM EST

Joseph Stiglitz just published an interesting analysis of Europe's economic and political situation: Reform or Divorce in Europe.

He points to four kinds of explanations for the current dire situation Europe is facing:

blame the victim (public debt, welfare state and labour-market protections)
bad leaders and policies (insufficent economic skills, austerity, structural reforms...)
blame European bureaucracy and regulations
an ill-designed euro

Frontpaged with minor edit - Frank Schnittger

Stiglitz kind of dismisses the first three explanations, except the second one, although he thinks that:

Most important, given the available tools, not even the most brilliant economic czar could not have made the eurozone prosper.

Therefore, he focuses on the fourth one:

That leaves the fourth explanation: the euro is more to blame than the policies and structures of individual countries. The euro was flawed at birth. Even the best policymakers the world has ever seen could not have made it work. The eurozone's structure imposed the kind of rigidity associated with the gold standard. The single currency took away its members' most important mechanism for adjustment - the exchange rate - and the eurozone circumscribed monetary and fiscal policy.
...
This system cannot and will not work in the long run: democratic politics ensures its failure.
...
the current halfway house is untenable. A system intended to promote prosperity and further integration has been having just the opposite effect.

But, instead of suggesting to get rid of the Euro, he proposes a set of solutions:

Only by changing the eurozone's rules and institutions can the euro be made to work. This will require seven changes:
· abandoning the convergence criteria, which require deficits to be less than 3% of GDP;
· replacing austerity with a growth strategy, supported by a solidarity fund for stabilization;
· dismantling a crisis-prone system whereby countries must borrow in a currency not under their control, and relying instead on Eurobonds or some similar mechanism;
· better burden-sharing during adjustment, with countries running current -account surpluses committing to raise wages and increase fiscal spending, thereby ensuring that their prices increase faster than those in the countries with current-account deficits;
· changing the mandate of the European Central Bank, which focuses only on inflation, unlike the US Federal Reserve, which takes into account employment, growth, and stability as well;
· establishing common deposit insurance, which would prevent money from fleeing poorly performing countries, and other elements of a "banking union";
· and encouraging, rather than forbidding, industrial policies designed to ensure that the eurozone's laggards can catch up with its leaders.

He concludes:

An amicable divorce would be better than the current stalemate.
Of course, every divorce is costly; but muddling through would be even more costly. As we've already seen this summer in the United Kingdom, if European leaders can't or won't make the hard decisions, European voters will make the decisions for them - and the leaders may not be happy with the results.

Although I think he tends - probably for the sake of his reasoning - to underestimate the role of leaders and the entanglement between ideology, policies and tools; It is nevetheless an intresting set of measures. Indeed, most, if not all, of them go clearly against austerity policies and adopt major changes to the current treaties. For example, abandoning the convergence criteria means abrogation of the TSCG treaty (which, by the way aims at imposing budget deficits lower than 0.5% of GDP, a.k.a. the "gold rule").

He does not develop the growth strategy issue and the ways the EU should help to reduce the differential of productivity between "laggards" and "leaders". This would require a major European investment plan orders of magnitude bigger than the ridiculously poor Plan Juncker.

However, Stiglitz acknowledges that the political situation is not favorable:

but today's eurozone leadership may lack the political will to carry them out.

So, implementing these measures requires significant changes in the EU institutions and in the political landscape, starting with more transparency in the EU institutions decision-making and more accountability towards the European citizens.

Stiglitz: Reform or Divorce in Europe | 79 comments (79 topical, 0 editorial, 0 hidden)

Re: Stiglitz: Reform or Divorce in Europe (4.00 / 4)

He probably doesn't go far enough, eschewing all mention of a fiscal Union, or common health, education, social welfare, employment, housing or infrastructural policies.

He also misses an essential political point: Most of Europe's key leaders are accountable to their national electorates, not a European one. It is illogical to expect (say) Merkel to adopt the above policies while she remains accountable to a solely German electorate.

Germany has been doing just fine with an ECB with a very limit remit and a European Commission with a tiny budget as a % of European GDP. So why should it permit change?

Unless a majority of Council members come to see it as being in their national interest to promote the above European wide policies, we will continue to have beggar thy neighbour economic austerity policies.

Even the shock of Brexit hasn't promoted a re-think. Will it take a collection of peripheral states threatening a joint exit to promote a re-think? It is beginning to look like it.

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by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Aug 23rd, 2016 at 03:05:52 PM EST

Re: Stiglitz: Reform or Divorce in Europe (4.00 / 2)

It feels odd to say, but I think they are incapable of thinking differently at this point, all beholden up to their necks. The switch is rusted stuck.

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Tue Aug 23rd, 2016 at 03:31:12 PM EST
[ Parent ]

Re: Stiglitz: Reform or Divorce in Europe (none / 1)

Yes we may well need a generational change in leaders. But the change in ideological orientation is what is most important. The economic market leads to centralisation in the European core, but the political market is still stuck in 28 nationalistic mindsets.

Unless EU institutions such as the EP, EU Commission and Council and ECB gain a lot more power and independence from Germany, not a whole lot will change.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Aug 23rd, 2016 at 03:39:06 PM EST
[ Parent ]

Re: Stiglitz: Reform or Divorce in Europe (4.00 / 4)

Indeed, Stiglitz does not address all the issues of a broad European political reform program, although his proposals include several features of a fiscal union. His concerns are more short-term: he just underlines the fact that, if not radically changed, the current economic and fiscal rules lead to the collapse of the Eurozone and of the EU. And he suggests some changes to avoid that, what I see as a prerequisite to a further deepening of the European Union. And he points to the lack of leadership, too.

So, the main question is: how to bring about change in Europe? It is the purpose of DiEM25

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet

by Melanchthon on Wed Aug 24th, 2016 at 09:05:24 AM EST
[ Parent ]

Re: Stiglitz: Reform or Divorce in Europe (none / 1)

Whule I'm not overly optimistic, it is too early to state that the shock of Brexit hasn't brought about a re-think.

And, yes, a peripheral states coalition could be a way to obtain major changes, including rewriting the treaties. A strong, Europe-wide political movement could certainly help convince some governments.

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet

by Melanchthon on Thu Aug 25th, 2016 at 09:18:56 AM EST
[ Parent ]

Re: Stiglitz: Reform or Divorce in Europe (4.00 / 3)

At this point, the only place a European-wide political movement could come from would be the far right, which would have to accommodate their nationalist positions to do so at all. That wouldn't look pretty, just pretty ugly.

by rifek on Thu Aug 25th, 2016 at 01:31:33 PM EST
[ Parent ]

Re: Stiglitz: Reform or Divorce in Europe (4.00 / 2)

It seems to me the most feasible task is to save as much as possible of the EU itself. The most feasible path to such an outcome would be for Italy to join with Portugal Greece and Spain and simply declare their own version of EURO, a SEURO, with their own SECB. They should invite any and all existing EMU members who wish to join their monetary union which would be run along lines appropriate to the needs and conditions of the members, including some form of shared unemployment insurance, retirement income and health care, which would immediately provide an internal recycling program, and have monetary policies helpful to generating growth in all member states.

If need be such a union could start with just Italy, Greece, Cyprus and Malta. They could join payments clearing systems already in existence but separate from the BIS, such as the existing ACU. Members of such a SEUR union would almost immediately experience a great improvement in their terms of trade and find their products very competitively prices, especially with their EU counter-parties. New SEURO members would have to just act, regardless of treaty obligations, asserting their sovereignty.

I believe that such action would quickly lead to many other EU members coming under great pressure to join the SEURO and expose the leaders of the remaining EU members as servants of Germany and/or elite interests in total disregard for the needs of the citizens.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Aug 24th, 2016 at 03:16:36 PM EST

Re: Stiglitz: Reform or Divorce in Europe (4.00 / 2)

Which is why it's not going to happen.

by Bernard (bernard) on Wed Aug 24th, 2016 at 07:43:56 PM EST
[ Parent ]

Re: Stiglitz: Reform or Divorce in Europe (4.00 / 2)

In this interview, he says that, unless major changes are implemented, the Eurozone collapse will happen. And, as I understand it, rather soon:

STIGLITZ: Italy could be the 'cataclysmic event' that leads to the fall of the eurozone

"That's going to be the end. What's going to happen is that there will be a definite consensus that Europe is not working. The diagnosis will be to shed the currency and keep the rest, or that Europe is not working and a broader rejection -- like in the UK.
"So my worry that this is precisely that kind of political event [something like Brexit] is that is what will be the catalyst for change."
Asked if he believed that the ongoing problems -- both politically and economically -- in Italy could trigger such an event, Stiglitz agreed, saying: "That is a big risk. Many people are now trying to work with Matteo Renzi [Italy's prime minister] to have him climb down from his commitment that he will resign if his referendum fails."

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet

by Melanchthon on Thu Aug 25th, 2016 at 09:12:13 AM EST

Re: Stiglitz: Reform or Divorce in Europe (4.00 / 2)

I agree that a financial collapse is likely within six months or less. And I agree that it could destroy the EMU and the Euro, if not the EU and its existing institutions. Unless it is planned there will be chaos. That is where preparations for a controlled collapse are vital. And that is precisely what an alternative monetary union, even with only two continental members, Greece and Italy, would be key. Island members would join immediately and other continental EU members would come under immediate pressure to join. The economic advantages will be immense, and a SEURO union will provide a left-compatible alternative to the probable right wing dystopia that otherwise will likely come to pass. Once triggered the process would be one of massive political jujitsu driven by events and economic pressure.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Aug 25th, 2016 at 02:22:38 PM EST
[ Parent ]

SEURO? (4.00 / 3)

I just don't get the logic behind talk of a SEURO - which I haven't heard many in Europe pushing in any case. Yes, the Euro has been overly dominated by Germany, although less so now with Draghi in charge.

But the argument against the Euro has always been based on the fact that the EU isn't an optimal currency area - it's economies are too diverse - and the fact that there isn't a political Union ensuring that fiscal transfers counter-balance the tendency for capital and wealth to accumulate in the stronger central economies.

A Seuro wouldn't change that much. Italy and Greece (say) don't trade all that much with each other compared to (say) Germany or France. And absent the EU splitting into Northern and southern Unions, the problem of the lack of a central government managing the currency remains.

So for me, there are only too options: the Euro or a return to national currencies. The Irish experience with the latter is not positive. Smaller currencies are too easy for even a medium size hedge fund to game. You always end up paying a risk premium for sovereign (and private) debt as well.

The major downsides of the Euro for for a small open economy like Ireland was when Germany needed low interest rates post unification and Ireland needed the opposite to stop the Celtic Tiger running amok. That and the total mismanagement of the Irish Banks crisis by the ECB, mistakes they have partially acknowledged and resolved to correct from now on.

Absent gross incompetence and major regional imbalances like that, the Irish experience of the Euro has been wholly positive: Low risk premia, low interest rates, low transaction costs, currency stability, certainty in trade, budgeting and pricing.

Frankly, hardly anyone in Ireland would trust the Government or Central bank to run a currency effectively. The absence of a devaluation option when a crisis strikes Ireland asymmetrically is a bummer and requires much more careful and longer term planning of the public finances. Brexit could well become such a crisis as it could hit Ireland much harder than most.

But even then I don't see an outcry to ditch the Euro. When it didn't happen in the wake of the Housing, banks, and financial crisis it is unlikely to happen at all. Even Greece, which was treated even more shoddily by the EU when the crisis struck gains enormous benefits from remaining in the Euro because of the size of their tourist industry relative to GDP.

Greece probably should have left the Euro given the state of its economy and the need to radically restructure its debt - but it didn't - and now it probably never will. For all it's structural deficiencies, the Euro is probably here for the long haul, and I'm not convinced total EU GDP growth would be all that much different if everyone returned to national currencies.

What we will see, however, is increased tensions and structural imbalances playing out in the political sphere, and I can't see how those can be resolved without a broadening of the ECB's remit to include unemployment and other measures, together with a much larger EU budget capable of channelling resources to areas of greatest need. Everything else is retrogressive.

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by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Aug 25th, 2016 at 07:04:27 PM EST
[ Parent ]

Re: SEURO? (4.00 / 2)

A Seuro wouldn't change that much.

This is where I think most go wrong in dismissing this project. Just having a monetary union seperate from the EMU and having that union set interest rates and the availability of finance to the needs of the periphery and start some recycling mechanisms would enable members to devalue their currency WRT the EURO, reducing the burden of debt on their people and boosting employment while improving terms of trade. This immediately eliminates many of the most oppressive aspects of the EMU on these societies. It would also better enable the members to deal with a likely financial collapse by adopting sane fiscal policies, for starters. Now other peripheral countries whose societies are suffering from inappropriate interest rates and fiscal policies would face economic pressure to join. These would become unbearable when a financial collapse occurs. And under this scenario the other peripheral countries currently suffering in a single union NOT addressing their needs would have a currency union available that is run in a manner that is appropriate to their needs.

This would lead to a situation where there are two separate currency unions with the current EMU containing the countries with export surpluses and some with deficits and another with countries that have almost exclusively consists of countries with current account deficits. But each could get fiscal and monetary policies suitable to their needs - i.e. two separate currency unions each of which much more resembles an optimal currency union than is the case now.

But the original founding countries of the SEURO Zone would have strong influence over the policies to be followed and a structure that is, inherently, left leaning due to the mutual social, fiscal and monetary policies and new entrants could be obliged to respect these policies. So Conservative led peripheral countries would be constrained in how right wing they could be due to the terms of entry. And they would join not because the liked the politics but because of massive political pressure and the alternative of chaos if they remain in the EMU.

I believe that all that is required is for two EMU members to form a separate currency union run along lines I described and for there to be a financial crisis for the above sequence of events to unfold.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Aug 26th, 2016 at 01:01:59 AM EST
[ Parent ]

Re: SEURO? (none / 1)

All of this assumes that Spain, Portugal, Italy, Greece and whatever other countries join a Seuro would actually pursue saner fiscal policies than they currently do as part of the Euro area. With the exception of Greece, their governments are all pretty right-wing right now, and have not shown any tendency to challenge ECB policies.

Euro interest rates and valuations are both pretty low for a few years now and no bar to getting their economies moving again. Devaluation can be a double edged sword, as it increase the burden of external debt held in Euros or $ or other external currencies and offers only a temporary reprieve in terms of improving cost competitiveness. Insofar as they seek to fund their deficits on sovereign debt markets, they would also have to pay a considerable risk premium on debts due to the risk of further devaluation and/or default.

Those economies do not trade with each other any more than they trade with their northern neighbours, and so wouldn't necessarily constitute an optimal currency area any more than they do now. Ireland used to be in a currency union with the UK but had no control over Bank of England policies and the frequent bouts of devaluations and very high interest rates suffered by Sterling then did us no favours. It made sense when 70% of our trade was with the UK, but no sense when our objective was to reduce our dependency on the UK as part of our wider project to integrate with the EU. Trade with the UK is now down to 15% and no one is even talking about re-joining a currency Union with Sterling or leaving the EU along with the UK.

The huge trade surpluses Germany runs with the rest of the Eurozone remains the key destabilizing factor and the Growth and Stability pact needs to be amended to penalise structural surpluses as much as deficits. I'm not convinced that a Seuro would address that problem much more effectively even with ongoing devaluations, and the overall effect could well be to tear the EU apart. There is no quick fix to the underlying problem - gross inequalities in economic development - which needs to be addressed at both a national and an EU level. That was a problem before the Euro was ever created and would outlive its demise, if it comes to that.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Aug 26th, 2016 at 12:55:44 PM EST
[ Parent ]

Re: SEURO? (4.00 / 5)

Frank, you make good points in your first paragraphs, but then you say:
"The huge trade surpluses Germany runs with the rest of the Eurozone remains the key destabilizing factor and the Growth and Stability pact needs to be amended to penalise structural surpluses as much as deficits."

We all know it needs to be.
It will not be. Not until a crisis forces the thing to collapse. Because Germany has hugely benefitted from this (Germans may not have, but they have been told that it is because of those lazy Southerners). You say that if Greece did not leave with Syriza it never will - a much stronger similar argument should be made with the pact (Greece may eventually conclude that following the diktats is clearly disastrous, while dropping out would mostly bankrupt non-Greek banks).

So if something needs to be yet won't be, then the feared outcome will happen. Not because it is particularly straightforward for it to happen, but because you can't forever cheat arithmetics.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Fri Aug 26th, 2016 at 01:23:09 PM EST
[ Parent ]

Re: SEURO? (4.00 / 2)

Frank, you continue to dismiss or ignore the main arguments for having a SEURO Zone. The founders WOULD be the ones to set the basic policies of mutualism and surplus recycling and would set the terms on which other countries could join. Establishing such a union may have NO EFFECT until a collapse occurs. But then it becomes a safety net. In the event, should the EMU collapse, a country would have an option to join a currency union that had programs that addressed its needs and gave it more weight than it would have with just its old currency. Just those facts and the knowledge that each country that joins the SEURO union makes that monetary union stronger would force trade deficit countries to join.

If the EMU remains but changes, the countries that have trade deficits and remain will become the new victims in the EMU, being sucked dry by the surplus countries. That alone will give them a powerful reason to join the SEURO union, regardless of how they feel about the politics and entry requirements. As the EMU loses trade deficit countries to the SEURO union it will become pointless for Germany to remain in the EMU and it will reestablish its own new Deutschmark and quickly find just how strong it is. Meanwhile, the actual citizens of new members of the SEURO union will start to see the advantages of that system and may well elect new leaders. It is the leaders of the peripheral countries that dislike the mutual support, pro-growth polices of the SEURO union.

The most basic factor here is that, given even a two member SEURO union, designed along the lines I have outlined, events and pretty clear political and economic imperatives drive the rest of the developments until the SEURO union is the larger of the two monetary unions - or the only union remaining. As for the value of debts owed the remaining EMU members, if any, the response should be: "Lets talk!"

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Aug 26th, 2016 at 04:50:40 PM EST
[ Parent ]

Re: SEURO? (4.00 / 2)

The founders WOULD be the ones to set the basic policies of mutualism and surplus recycling and would set the terms on which other countries could join.

WOULD is the operative term here: there's no sign nor indication of anything of the kind to be any likely to happen, even in the eventuality of a catastrophic crisis of the EZ, so, no offense, but this is speculative fiction at this time, no matter how interesting as an intellectual exercise.

by Bernard (bernard) on Fri Aug 26th, 2016 at 08:14:00 PM EST
[ Parent ]

Re: SEURO? (4.00 / 2)

I think we are agreed on one thing: you cannot have a stable currency Union where some countries are in permanent surplus and others are in permanent deficit. You either have to address the structural imbalances, or one or other have to leave. The argument for the deficit countries to leave is that devaluations are less painful than internal deflationary policies. Probably the simpler solution would be for them to kick Germany out by systematically voting against everything Germany wants on the ECB Council. The problem is that none of them have the gumption to do so.

We are also probably agreed that nothing major will happen until the next big financial crisis. That is because simple arithmetic is beyond the capabilities of our dear leaders and their instincts are to stay put for as long as they possibly can - like the frog in the cauldron of water being gradually heated up to an unsustainable level.

So we will have a continuation of current beggar thy neighbour policies and anaemic growth. Until the next big bang.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Aug 26th, 2016 at 10:27:47 PM EST
[ Parent ]

Re: SEURO? (4.00 / 2)

I suppose that, in the event, it is conceivable that Greece and Italy, or possibly just Greece with Cyprus and Malta could form a SEURO currency union in the days following a collapse. Were they to do so there is a chance the events I describe could unfold. Or, perhaps everyone will just want chaos and destruction. Few people have ever lost money betting on the social incompetence of our species.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Aug 27th, 2016 at 04:09:30 AM EST
[ Parent ]

Re: SEURO? (none / 1)

Malta is probably more likely to join Sterling than a Seuro based on trading patterns. Most trade in Europe is North South, not east west.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sat Aug 27th, 2016 at 12:04:35 PM EST
[ Parent ]

Re: SEURO? (none / 0)

At least they would have a potential refuge that suited their needs.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Aug 27th, 2016 at 11:07:06 PM EST
[ Parent ]

Re: SEURO? (none / 1)

Why would Greece and Italy, or Greece and Cyprus and Malta be better off with a currency union than all alone?

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Carrie (migeru at eurotrib dot com) on Sun Aug 28th, 2016 at 01:57:39 PM EST
[ Parent ]

Re: SEURO? (none / 0)

Combined, their currency and economy would have greater weight and be less susceptible to gaming by hedge funds. Joining the Asian Clearing Union would have other advantages than just being able to clear payments without interference by the BIS, etc. It also would offer opportunities for investment in a SEURO zone by all members of the ACU, not least because of the signal it would send about alignment, which, itself, likely would have a paralyzing effect on other members of the EMU, NATO and creditor nations.

Another large effect would be the very existence and the policies of a SEURO Monetary Union. The SEURO would almost certainly be devaluated with respect to the EURO and fiscal policies would be more favorable to growth in the SEURO economies. This would improve the terms of trade for existing northern trade partners while creating new markets in states party to the ACU.

But, presuming this was done in conjunction with a financial collapse in the EU, it would provide a refuge for other EU trade deficit nations wanting a safe harbor for their own currency and monetary policies favorable to their own needs.

But the biggest effect might well be on the perceptions of German leaders. They would be faced with the danger of having numerous trade deficit members of the EU joining the SEURO and of the EMU being reduced to a union containing mostly trade surplus countries and Germany would rightly be concerned about where that would lead. As Frank has noted, there is much that Germany could do to change its relations with Greece and Italy.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Aug 28th, 2016 at 03:04:28 PM EST
[ Parent ]

Re: SEURO? (4.00 / 3)

But you are proposing to join countries of very unequal sizes. Greece would dominate a Greece - Cyprus - Malta union, and Italy would dominate an Italy - Greece union. Politically, that is unsustainable.

And Cyprus and Malta are only in the EU as a sop to the UK to compensate the addition of Germany's sphere of influence in 2004.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Carrie (migeru at eurotrib dot com) on Sun Aug 28th, 2016 at 03:29:00 PM EST
[ Parent ]

Re: SEURO? (4.00 / 4)

I think - and I've said this before, that everyone is massively overestimating the difficulty of the problem.

In order to balance the european economy,
Germany needs higher wages and higher consumption. Germany has the productivity to back those up, so they can afford it.

It bloody well has to be possible to get popular backing in Germany for a policy of "Germans should be paid more money and have more fun for the greater good". Seriously. How is that not the easiest political message in history to sell?

So basically, what is required is simply that the arguments of Keynes be translated into German and circulated in venues where Germans will actually read them.

by Thomas on Sat Aug 27th, 2016 at 06:24:24 AM EST
[ Parent ]

Re: SEURO? (4.00 / 2)

Persuade Germans to be frivolous and have fun? That is a hard sell!

But I agree, that is by far the easiest solution. Greek holidays for all funded by the German Government! Greek retirement homes for German retirees funded by the German Government - cheaper than keeping retirees in Germany - so it can actually be sold as a thrifty policy. A European health care policy where equivalent treatment is provided in country of residence not country of origin. (Already applies to emergency healthcare interventions, but extended to specialist and after-care). Allows the Greek health care industry to modernise and expand funded by the German taxpayer.

It doesn't take much imagination to make this happen, and all can be sold as a net benefit to Germans as well.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sat Aug 27th, 2016 at 12:15:07 PM EST
[ Parent ]

Re: SEURO? (4.00 / 3)

Germany's Drag - The New York Times

So Germany's fiscal obsession has a sort of multiplier effect on Europe, and indirectly on the world, that is disproportionate even to Germany's economic size. And this makes me wonder whether all the sea-change in elite opinion that we've seen will do much good, since the government that most needs to change its policies isn't listening.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sat Aug 27th, 2016 at 12:45:53 PM EST
[ Parent ]

Re: SEURO? (4.00 / 2)

Excellent suggestion, Frank! How many Germans would prefer to retire in a warmer climate where the cost of living is lower and where their very presence would be aiding the Greeks? Most will have relatives still working in Germany so they can visit Germany for Christmas and New Year or whenever they wish and luxuriate in the warmth of the Aegean or the Adriatic for most of the year. Cyprus might want some of that action as well.

The problem with implementation is simply the ability to penetrate the minds of German leaders and voters. How might that come about?

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Aug 27th, 2016 at 11:20:30 PM EST
[ Parent ]

Re: SEURO? (none / 1)

"But that would be socialism!" And it appears Europe has become as imbecilic over that shibboleth of idiocy as the US always has been, with a German brass band leading the parade.

by rifek on Tue Aug 30th, 2016 at 02:03:12 PM EST
[ Parent ]

Re: SEURO? (4.00 / 2)

But how does it help the German hereditary oligarchs retain their dominant position?

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Aug 30th, 2016 at 05:23:23 PM EST
[ Parent ]

Re: SEURO? (none / 0)

The German hereditary oligarchs will probably own most of the hotels and retirement homes in Greece... so the benefits to Greece will be limited to increased employment and tax revenues.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Aug 30th, 2016 at 06:43:46 PM EST
[ Parent ]

Re: SEURO? (none / 1)

So by creating a foreign absentee landlord class.

I can see no way that could possibly go wrong.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Aug 30th, 2016 at 06:59:40 PM EST
[ Parent ]

Re: SEURO? (4.00 / 2)

All of this assumes that Spain, Portugal, Italy, Greece and whatever other countries join a Seuro would actually pursue saner fiscal policies than they currently do as part of the Euro area. With the exception of Greece, their governments are all pretty right-wing right now, and have not shown any tendency to challenge ECB policies.

Unless the Seuro has a true fiscal union.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Carrie (migeru at eurotrib dot com) on Sun Aug 28th, 2016 at 01:55:41 PM EST
[ Parent ]

Re: SEURO? (none / 1)

Unless the Seuro has a true fiscal union.

The premise of my argument is that a SEURO Monetary Union would start with significant recycling mechanisms including a shared, portable unemployment, health care and retirement scheme, and both monetary and fiscal policies suitable to the needs of trade deficit countries. Another premise is that these conditions would have to be accepted by new members seeking to join.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Aug 28th, 2016 at 03:21:10 PM EST
[ Parent ]

Re: SEURO? (4.00 / 2)

That's the reason why I think that it is even less likely to happen than the radical reform of the treaties proposed by Stiglitz.

And I am sure that, for political and ideological reasons, as well as national and individual pride, no political leader or party will dare to prepare a second class currency union until the crisis has happened. And once the crisis happens, it will be too late...

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet

by Melanchthon on Sun Aug 28th, 2016 at 03:31:10 PM EST
[ Parent ]

Re: SEURO? (none / 1)

And once the crisis happens, it will be too late...

To the contrary, the day or the day after the collapse has occurred would be the most opportune time to put such a plan into action. The shock will be paralyzing action by most and they will be trying to figure out what they can do. Hopefully, some discussions and a general plan will have been prepared. Hopefully, Yanis Varoufakis will be involved, preferably as a senior advisor or as head of the SEURO Monetary Union, and capital controls will immediately be put into place. Then events will drive the rest. As soon as another EMU member joins the SEURO perceptions will change. And, at the least, countries that join will be joining a Monetary Union run along the lines that the EURO should have been run - for the benefit of all members. I suspect that, even before any new members join, Germany will see the threat and be forced to respond. At least the ice dam will have been broken.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Aug 28th, 2016 at 08:09:43 PM EST
[ Parent ]

Re: SEURO? (4.00 / 2)

Well that would be a very different response to the way they responded to the last financial crisis, which was to double down on austerity policies. Is there any evidence to support your conviction the response would be any different now?

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sun Aug 28th, 2016 at 08:37:59 PM EST
[ Parent ]

Re: SEURO? (none / 1)

My argument is hypothetical and analytical. I am a long time admirer of H.G. Wells and his fictive utopian novels and I believe it IS possible to make contributions through such fictive approaches.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Aug 29th, 2016 at 12:37:35 AM EST
[ Parent ]

I hope I am wrong (4.00 / 4)

As you know, I sometimes like to take an argument to its logical conclusion to see where it might lead to, regardless of whether that accords with conventional views of reality. But I also like to be clear where there is supporting evidence and where what I am saying is, at best, hypothetical, and at worst, counterfactual.

In the case of your argument, you seem to be making the assumption that Southern European leaders are secret admirers of Yanis Varoufakis and are intent on ensuring that, unlike Greece, they will not allow their countries to become isolated, bullied into defeat by the Euro Group, and sold down a river.

I don't know (say) Italian politics well enough to be definitive, but I struggle to find any evidence to confirm your hypothesis. In fact, what evidence I see appears to confirm the opposite: That the hard nationalist right is in the ascendant and we are more likely to see a reversion to national currencies and nationalist/fascist policies than the creation of any grand redistributive schemes such as the Seuro.

The irony is that it turns out it was the UK, which has done relatively well out of the EU, which has been the first to call time on its participation in the European project. Greece probably had a much better cause for doing so. But the consequence is that the EU is now in retrenchment mode and we are in the business of saving what we can rather than in engaging in new, collective, imaginative initiatives.

Even I am pushing the boundaries of political reality when I call for the development of much greater EU integration of health care, education & training, social welfare, pensions/retirement, procurement, energy sustainability and security, infrastructural development, and Governance systems even though you can make a very good rational case that such integration could deliver much greater collective benefits at reduced cost than isolated initiatives by individual member states. Thus, even though such policies would have a progressive redistributive impact, all members states could still be winners.

I am hoping that the shock of Brexit combined with the persistence of anaemic growth despite all monetary stimulus will enable a re-think. The UK has always had a baleful influence on all community social market and integrationist initiatives, and so it's absence from the decision making process could be a positive. However the tide may be going out on the European Project. Merkel was the last European leader of real stature who could have made it happen, but her authority has been eroded by the refugee crisis and its impact on Germany. Hollande and Rajoy are lame ducks and the trend elsewhere is almost all in rightward, nationalist directions. What progressive movements there are are almost all marginal.

I hope I am wrong...

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Aug 29th, 2016 at 07:45:32 AM EST
[ Parent ]

Re: I hope I am wrong (none / 1)

I have made it abundantly clear that the most I would hope for is that the intital founders of a SEURO would actually take the steps to form such a union. The rest would be driven by events and consequences. Else the whole argument would be pointless, as most already assume it is.

As to justification, all I am arguing is that it is better to have some prepared position that is inherently left compatible into which EMU members that are unable to endure a collapse of the EURO and the chaos of again having a small economy and currency could take refuge or fall. It is, inherently, as strategy for desperate times. If it is better than nothing it will have achieved something.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Aug 29th, 2016 at 01:42:48 PM EST
[ Parent ]

Re: I hope I am wrong (4.00 / 2)

I think we're about due for a Wall St Crash Mk II, followed by a move to fascism and violent dictatorship, followed by war, which may be terminal. (Most of Europe would be reduced to a radioactive swamp.)

Isn't that how these things usually end?

Progressives tend to forget that left-leaning movements only make headway when they have the support of the bourgeoisie.

In the UK, Labour would have gotten nowhere was a movement of workers. It was the support of the upper classes that made it a viable political movement.

And then after WWI, aspirations to communism and support for the Soviet Union were a right of passage for most of the Oxbridge crowd.

Today? The Oxbridge crowd mostly want jobs in finance and/or a nice property portfolio. Organised idealism is rather hard to find.

The Parliamentary Labour Party and the Fabian Society are practically camping out of the doorstep of the Tory party. There are some vague lingering remnants of interest in Social Democracy - certainly no Socialism - but even plain old centrism is considered extremist left-wingery now.

And there's nothing new to take the place that socialism used to have. Occupy failed, mainstream progressives in the US are a wholly owned subsidiary of Washington Inc, and Trump is taken seriously as a presidential candidate.

As is Hillary.

There's very little to be optimistic about. Technologically, there's endless scope for change. But it's unlikely to happen without a convulsion that clears away the old zombie form of insane neoliberalism and replaces it with something fresher and better able to imagine and create a humane future.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Aug 29th, 2016 at 03:29:22 PM EST
[ Parent ]

Re: SEURO? (none / 1)

Yes. All the "something less than a train wreck" scenarios rely on the classical liberal axiom of rational actors acting rationally, when history indicates we'll be far more likely to get, "When in danger or in doubt, run in circles, scream and shout."

by rifek on Tue Aug 30th, 2016 at 02:48:51 PM EST
[ Parent ]

Re: SEURO? (3.67 / 3)

Hopefully, some discussions and a general plan will have been prepared.

As Migeru pointed elsewhere, if such a plan was prepared in advance, it would raise a lot of political opposition, unless it is kept secret, which would be impossible.

And I can say I seriously doubt Yanis Varoufakis would support a SEURO union.

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet

by Melanchthon on Sun Aug 28th, 2016 at 09:20:15 PM EST
[ Parent ]

Re: SEURO? (none / 1)

Informal discussions between principals could be kept contingent, hypothetical and fairly confidential. Those involved would have to be careful not to deny the rumors, just dismiss them as mere rumors based on hypotheticals. "It is never official until it is denied."

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Aug 28th, 2016 at 09:34:23 PM EST
[ Parent ]

Re: SEURO? (none / 1)

It would make perfect sense for Italy or other countries faced with the prospect of the collapse of the Euro to consult with Yanis Varoufakis if he agrees. After all he almost certainly has the best grasp on all of the problems involved from his experience with Greece. And it would be impossible to distinguish whether those discussions also included a possible SEURO Union - unless a party to the discussions spoke publicly, and even then...

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Aug 28th, 2016 at 09:43:44 PM EST
[ Parent ]

Yanis Varoufakis (4.00 / 4)

Yanis Varoufakis is politically toxic as far as Europe's political and financial elite are concerned. Anything involving him will immediately be dismissed as:

academic
not serious
wrong headed.

So yes, if a Seuro actually emerged from any discussions involving him it would come as a complete shock to Europe's elite as they will have steadfastly ignored everything involving him. He could have been blogging about it for months and presenting academic papers on the topic, and it would still come as a shock to them.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sun Aug 28th, 2016 at 11:39:09 PM EST
[ Parent ]

Re: Yanis Varoufakis (none / 1)

So much the better. "Europe's political and financial elite" NEED a whack up side their collective heads with a 2X4 to get their attention. Might even get some to pull their heads out of where they have so long been - though I cannot imagine how the mechanics of that metaphor might work.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Aug 29th, 2016 at 12:03:21 AM EST
[ Parent ]

Re: SEURO? (4.00 / 4)

Agreed. His ideas would seem to be more along the line of creating a parallel currency in the deficit country, which under Lisbon is legal.
This would seem easier to organise than SEURO by an order of magnitude and make sure that most of the stimulus happens locally until such time as this currency is recognised abroad, which may be never. So that makes two advantages. Not sure how it could be gamed by the financial sector as convertibility would be restricted.

There is a possibility that in a second phase such currencies could join a SEURO I suppose, but that could not be an immediate response to a crisis.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Mon Aug 29th, 2016 at 06:38:58 AM EST
[ Parent ]

Re: SEURO? (none / 1)

There is a possibility that in a second phase such currencies could join a SEURO I suppose, but that could not be an immediate response to a crisis.

That would depend entirely on the desires of the first two members of a SEURO. An Itallian 5* led government and Greece could very well decide to set up such a SEURO just for the reasons I have indicated. That step alone might bring about a change in the attitudes of the German Government which could obviate the need - or not. But the very existence of such a union would be an existential threat to Germany's current dominant position - if Germany has the wits to see that and act on it.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Aug 30th, 2016 at 09:52:29 PM EST
[ Parent ]

Re: SEURO? (4.00 / 2)

Just having a monetary union seperate from the EMU and having that union set interest rates and the availability of finance to the needs of the periphery and start some recycling mechanisms would enable members to devalue their currency WRT the EURO, reducing the burden of debt on their people and boosting employment while improving terms of trade.

"Just"

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Carrie (migeru at eurotrib dot com) on Sun Aug 28th, 2016 at 01:54:17 PM EST
[ Parent ]

Re: SEURO? (4.00 / 4)

There is also a very high risk of captal flight and its consequences for the European Union: the day after a split takes place, money will flow from SEURO countries to NEURO countries, and capital controls will have to be put in place in order to prevent a collapse of the SEURO countries financial sector, with dire consequences for the EU.

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet

by Melanchthon on Sun Aug 28th, 2016 at 03:20:08 PM EST
[ Parent ]

Re: SEURO? (4.00 / 6)

While the mishandling of Ireland may have been acknowledged, the general mishandling continues. Right now the commission, backed by Eurogroup and ECB, is strangling Finland's economy by the debt rules.

After cutting across the board last year, this year the Finnish education system is going through the shredder. Yes, they are sacrificing their world famous competitive edge to meet arbitrary targets. And the Commission lectures them for not meeting the targets fast enough.

And Ireland's experience might in general be good, if one ignores the horrible advice and threats of closed ATM's, but if one looks at GDP, the eurozone is growing slower than the non-eurozone EU. And while GDP is a bad measure, it is a bad measure with legal weight in the eurozone.

I think a bad divorce is the most likely scenario, right now probably starting with Italy. M5* is ahead in the polls, a financial crisis is looming, the referendum might get a no, etc. So new elections might be called, M5* might win and take Italy out of the eurozone.

I just hope they have the sense to hire some consultants from Greece.

by fjallstrom on Sun Aug 28th, 2016 at 09:10:10 AM EST
[ Parent ]

Re: SEURO? (4.00 / 4)

If Germany doesn't develop some political economic literacy soon, that might well be an outcome, although I still think the other members ganging up on Germany and demanding change would be a less painful option. Germany leaving the Euro would be the ultimate best solution if that doesn't work. The disruption caused to a smaller member state of leaving the EU/Eurozone would make Brexit look easy by comparison.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sun Aug 28th, 2016 at 11:46:50 AM EST
[ Parent ]

Re: SEURO? (4.00 / 5)

The MV5* is unequivocally Keynesian in its approach to economics - with a dash of Veblen in its full-throated support of artisanry and small family businesses with regional focus on quality to solve unemployment, through eco-tourism, better museum and UNESCO site management and bailing from the Euro.
Contrary to one up thread comment, Italy is not swinging right. Salvini (Italian Trump/LePen/Farage type) is not that popular, notwithstanding being the only viable candidate emerged from the unholy mess Berlu's clinging to a phantom throne has caused in the right ranks. Salvinitial at 15% is significant but thanks to the MV5* still a sideshow. No-one else has emerged from the right, and probably won't even though plenty would still vote right if they had a less boorish leader than Salvini.
Italy is trending right mostly because Renzi is a Blairite to the bone, talking left and walking centre-right. Lots of bailouts and ins for bankster-buds, dirty industries, ritual kowtowing to Merkel, 3-card Monte fiscal legerdemain, new F-35s, poodle proxy warring by letting raids on Libya fly from bases here, sanctions on Russia, continued presence in Afghanistan and Iraq costing a million Euros a day, need I go on?
Booed wherever he goes by the public, he serves his lobby masters enthusiastically, spinning so many PowerPoint lies, his nick is Pinocchio.
The right is stymied, the so-called left heading that way as they have no plan B. Post-Renzi, the deluge...
The banks are teetering.
Good news: MV5* has governed Roma and Torino now for a while and improvements are happening.
A non-trivial accomplishment.
Beppe Grillo has dialed back the foam factor and become a wiser, though still eloquent sideline supporter.
Things are shaping up for a lively autumn as his constitutional reform is not polling well in spite of the blatantly biased reporting on state TV.
The MV5* are waxing, dynamic and offeringredients such an intelligent blend of policies that many Italians are waking up to their appeal.
It is a pleasure to see their continued ascent to power. They remain firm under constant attack, and are upping their game.
Whether their little sling can unseat Goliath is another story, though there are some very promising signs.

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Tue Aug 30th, 2016 at 12:12:45 AM EST
[ Parent ]

Re: SEURO? (4.00 / 3)

Is a European currency union not including Germany politically feasible in France? It doesn't look like it. And most of the pro-EU forces in the peripheral euro countries and in France want to be more like Germany and want a strong currency.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Carrie (migeru at eurotrib dot com) on Sun Aug 28th, 2016 at 01:52:38 PM EST
[ Parent ]

Re: SEURO? (none / 0)

The question about France is: should it be part of the NEURO or the SEURO? Economically, it should be part of the NEURO. Politically, it is impossible: any political party or leader proposing to join the SEURO would be disavowed by the voters.

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet

by Melanchthon on Sun Aug 28th, 2016 at 03:12:35 PM EST
[ Parent ]

Re: SEURO? (4.00 / 2)

I'm not sure I agree economically France can actually be in the Neuro. Its economic structure is not that of a surplus country.

It is the delusion that France belongs economically with Germany that makes it politically impossible domestically for France in the Seuro.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Carrie (migeru at eurotrib dot com) on Sun Aug 28th, 2016 at 03:27:13 PM EST
[ Parent ]

Re: SEURO? (4.00 / 3)

Sorry, it is a typo. I think that, economically, France belongs to a SEURO.

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet

by Melanchthon on Sun Aug 28th, 2016 at 03:33:56 PM EST
[ Parent ]

Re: SEURO? (4.00 / 3)

I think this may be the point that ARGeezer, from his redoubt in deepest, darkest, Trumpian USA, is missing: the almost complete ideological capture of financial elites in almost all EZ countries. They all want to be like Germany, all want a STRONG currency, are dismissive of Keynesian economics, and simply can't do arithmetic.

They won't create or join a Seuro because that would be like admitting you are a second class citizen incapable of standing on your own two feet. That is why they won't even really challenge Germany on the ECB Board where they have a majority. They BELIEVE in austerity, want to emulate Merkel, and like being whipped into line by a dominatrix style Eurogroup. Austerity is their sexual gratification mode...

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sun Aug 28th, 2016 at 05:49:04 PM EST
[ Parent ]

Re: SEURO? (4.00 / 3)

So for me, there are only too options: the Euro or a return to national currencies. The Irish experience with the latter is not positive. Smaller currencies are too easy for even a medium size hedge fund to game. You always end up paying a risk premium for sovereign (and private) debt as well.
...
Absent gross incompetence and major regional imbalances like that, the Irish experience of the Euro has been wholly positive: Low risk premia, low interest rates, low transaction costs, currency stability, certainty in trade, budgeting and pricing.

The Irish experience of the euro ha been wholly positive if you exclude of course the financial crisis and its aftermath, especially the way the ECB forced Ireland to deal with its banks. I should note because of Anglo Irish Banks Ireland easily did worst of all countries in the recent European Banking Authority stres test.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Carrie (migeru at eurotrib dot com) on Sun Aug 28th, 2016 at 02:02:59 PM EST
[ Parent ]

Re: SEURO? (none / 1)

That's the bit you excluded from your quote. Anglo Irish Bank is no more, and some of its former executives are in Jail where they belong albeit serving altogether too short sentences.

The cause and handling of the Irish banks crisis was a mixture of outright fraud, almost completely incompetent regulatory oversight, inappropriate interest rates and credit availability, and ECB extortion. It remains to be seen whether the ECB has really learned it's lesson, but you can't have a Single Market in financial services with 28 different regulatory regimes, and at least some progress has been made in improving banking oversight at an EU level.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sun Aug 28th, 2016 at 05:58:06 PM EST
[ Parent ]

Re: SEURO? (4.00 / 2)

Well, ARGeezer is in good company:

A split euro is the solution for Europe's single currency - Joseph Stiglitz

In this opinion paper, he develops an analysis alas too familiar to us:

The problems with the structure of the eurozone may be insurmountable
...Put simply, the euro was flawed at birth. It was almost inevitable that taking away two key adjustment mechanisms, the interest and exchange rates, without putting anything else in their place, would make macro adjustment difficult. Add to that a central bank mandated to focus on inflation and with countries still further constrained by limits on their fiscal deficits, the result would be excessively high unemployment and gross domestic product consistently below potential output. With countries borrowing in a currency not under their remit, and with no easy mechanism for controlling trade deficits, crises too were predictable.
The alternative to adjusting nominal exchange rates is adjusting real ones -- having Greek prices fall relative to German prices. But there are no rules in place that could force a rise in German prices and the social and economic costs of forcing Greek prices to fall enough are enormous.

Stoglitz then mentions the same set of measures as in the paper quoted in this diary. However, he recknons that, given the current political situation in Germany, it is unlikely to happen:

But these seem well beyond the politics of Europe today, with Germany still arguing that "Europe is not a transfer union".

Not unlike ARGeezer's suggestion, he thinks that a NEURO/SEURO system could be the solution:

It is important that there can be a smooth transition out of the euro, with an amicable divorce, possibly moving to a "flexible-euro" system, with say a strong Northern Euro and softer southern euro. Of course, none of this will be easy. The hardest problem will be dealing with the legacy of debt. The easiest way of doing that is to redenominate all euro debts as "southern euro" debts.

While I agree with the pessimistic diagnosis, in my humble opinion, both ARGeezer and Stiglitz are reasoning in a politically ideal world: they do not take into account the European political landscape and the complexity of the relationships between countries, as well as the psychology and the motivations of the leaders.

A "smooth transition" is not going to happen. Leaders who will be seen as downgrading their country to a "second-rate" currency would most probably pay it dearly politically. People would certainly prefer to revert to national currencies. Indeed, the current leading parties will not move until a major crisis happens.

So any solution - be it the break-up of the Eurozone or significant changes to the treaties like the ones proposed by Stiglitz - will require a major crisis. And a major crisis could make it possible to unlock the German obstruction to changes towards a transfer union.

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet

by Melanchthon on Sun Aug 28th, 2016 at 02:23:19 PM EST
[ Parent ]

Re: SEURO? (4.00 / 4)

The easiest way of doing that is to redenominate all euro debts as "southern euro" debts.

In other words, Germany should be the one leaving the euro, which is also an argument familiar to us.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Carrie (migeru at eurotrib dot com) on Sun Aug 28th, 2016 at 02:43:50 PM EST
[ Parent ]

Re: Stiglitz: Reform or Divorce in Europe (4.00 / 3)

Preparations for a collapse can only happen in secret, obviously. But there needs to be public debate beforehand on the relative costs of keeping versus dropping the euro, and there is no sign of that.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Carrie (migeru at eurotrib dot com) on Sun Aug 28th, 2016 at 01:50:34 PM EST
[ Parent ]

Treaty change (4.00 / 4)

These are the two all-important words missing from Stiglitz'

today's eurozone leadership may lack the political will to carry them out

It's not just a matter of political will. Even the fiscal compact, itself an intergovernmental treaty, took two years to negotiate and approve under duress.

What Stiglitz proposes could only be agreed in the throes of another crisis affecting Germany. But the politically ascendant insurgent force in Germany is not Varoufakis' DiEM25, but the extreme-right AfD. And the now anti-euro FDP is making a comeback.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Carrie (migeru at eurotrib dot com) on Sun Aug 28th, 2016 at 01:48:17 PM EST

Re: Stiglitz: Reform or Divorce in Europe (4.00 / 5)

What the EU needs above all is to move away from the silly notion of trying to regulate the bottom line, and occasionally the top line, but leaving everything in between as Somebody Else's Problem.

The EU needs to start building and running actual infrastructure - railways, power lines, ports, airports, and other cross-border infrastructure. It needs to do so on budgets and scopes of work determined by engineering reality, not arbitrary fiscal rules. Both because this will directly show people an EU that makes their lives better and because it will foster the correct mentality in the European bureaucracy - a mentality of operations and engineering rather than finance and cost control.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Aug 28th, 2016 at 05:40:09 PM EST

Re: Stiglitz: Reform or Divorce in Europe (4.00 / 2)

Sorry, but in the modern world the last thing a senior civil servant wants to do is actually run an operation. It's all about giving Directions, setting standards, controlling budgets - and letting someone else take the flak when - in the real world - it turns out the problems are beyond the scope/capability of those objectives, standards and costs. Modern governance systems are all about avoiding accountability for actual delivery. It's always somebody else who must have fucked up and failed to deliver on the absolutely flawless strategy.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sun Aug 28th, 2016 at 06:11:44 PM EST
[ Parent ]

Re: Stiglitz: Reform or Divorce in Europe (4.00 / 4)

I totally agree, with some remarks:
As a priority, investment should target peripheral countries,

for infrastructure works, thus contributing to boost employment and develop industrial capacity (provided the works are not made using detached workers...).
for a massive effort in education and vocational training to reduce the gap with center countries.

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet

by Melanchthon on Sun Aug 28th, 2016 at 06:12:23 PM EST
[ Parent ]

Re: Stiglitz: Reform or Divorce in Europe (4.00 / 5)

Local content requirements is a perfectly fine and respectable way to do industrial policy, but I disagree about using economic rather than engineering indicators to prioritize projects. Absent the fixed exchange rate policy (and that will need to go in any case), I think priority needs to be based on which areas are underserved by the relevant infrastructure, not which areas are underserved in pork barrel.

Now, it so happens that underserved countries will usually be peripheral countries, both because good infrastructure helps you to not be peripheral and because core countries are the ones who have historically been able to have nice things. But I see a danger in letting economic stimulus take priority over engineering. Partly because a major point of the exercise is to make the federal EU bureaucracy think in terms of industrial rather than fiscal policy. And partly because building rail lines to nowhere isn't going to win the EU any friends long-term.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Aug 28th, 2016 at 06:49:46 PM EST
[ Parent ]

Re: Stiglitz: Reform or Divorce in Europe (4.00 / 3)

..That would be ignoring engineering reality. Europe needs infrastructure that ties it together. Geography dictates a whole bunch of it will be in Germany.
Which is fine.
Germany is also running it's economy way below capacity, so having some stimulus imposed on it is all well and good.

by Thomas on Sun Aug 28th, 2016 at 06:57:40 PM EST
[ Parent ]

Re: Stiglitz: Reform or Divorce in Europe (4.00 / 5)

I think you underestimate the disparity in existing infrastructure. For German infrastructure to tie Europe together you need infrastructure in other parts of Europe to connect to.

The most obvious candidates for rail projects are Spain, Poland, and the Balkans. And I could definitely see a lot of time and effort being well spent on dredging and reworking bridges to make more of our rivers navigable. Because it's really hard to beat barges for cost and energy efficiency in hinterland transportation.

The power grid is in a lamentable state all over, so you can pretty much prioritize your projects by tossing darts at a map - I promise you you'll find a worthwhile way to spend your engineers' time within a hundred km of any point of impact.

I could also see potential in creating an East Mediterranean transshipment hub to match Hamburg and Algeciras, but the private sector seems to be doing okayish at building ports so the urgency is probably not very great.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Aug 28th, 2016 at 07:10:06 PM EST
[ Parent ]

Re: Stiglitz: Reform or Divorce in Europe (4.00 / 2)

Could I have an undersea rail tunnel linking Ireland to mainland Europe please...

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sun Aug 28th, 2016 at 07:14:45 PM EST
[ Parent ]

Re: Stiglitz: Reform or Divorce in Europe (4.00 / 4)

Not unless it goes via the UK, no.

But I could see a case for linking Ireland to Wales and Northern Ireland to Scotland, and giving the entire English and Scottish rail net an overhaul.

And a second English Channel tunnel, obviously.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Aug 28th, 2016 at 07:19:06 PM EST
[ Parent ]

Re: Stiglitz: Reform or Divorce in Europe (none / 1)

Perhaps if British rail services are re-nationalised...

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sun Aug 28th, 2016 at 07:37:59 PM EST
[ Parent ]

Re: Stiglitz: Reform or Divorce in Europe (4.00 / 2)

One of the very tangible advantages an overbearing EU bureaucracy could provide if it were functioning properly would be to just go in and build cross-country corridors, with appropriately located pre-works for hooking up local connections, and proper right-of-way reservations around them to allow later expansion if the locals come to their senses.

If the locals insist on not connecting their cities to a perfectly nice network backbone like that, well you can drag a horse to water but you can't make it drink.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Aug 28th, 2016 at 07:41:37 PM EST
[ Parent ]

Re: Stiglitz: Reform or Divorce in Europe (4.00 / 4)

... Tunnels for everyone!

A few hilarious links:

http://www.uic.org/cdrom/2006/wcrr2006/pdf/388.pdf

https://www.researchgate.net/publication/37449974_Global_modelisation_of_the_Swissmetro_maglev_using _a_numerical_platform

Key idea: social and economic networks are limited in the end by travel times. Planes are fast, but can't land in city centers, and getting on one is a major production.

Planes are fast because they can go high, where air resistance is less because there is less air.

If you run your trains in a tunnel, and seal the tunnel properly, you can pump most of the air out of the tunnel and run trains faster than airplanes. And keep the whole city center stations, precise schedules and rapid on-off boarding paradigm.

The Japanese proposal is considering 900 KM/h maglevs. This how you do nationbuilding by engineering fiat - once the tunnels are done and the tracks are laid, the places connected will be so close in terms of travel time that untangling them politically becomes a very dicy proposition.
Also, of course, some military utility to the ability to redeploy forces at 900km/h underground.

by Thomas on Sun Aug 28th, 2016 at 10:29:59 PM EST
[ Parent ]

Melanchthon, Migeru, JakeS... (4.00 / 5)

Almost like old times...!

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sun Aug 28th, 2016 at 06:26:28 PM EST

Re: Melanchthon, Migeru, JakeS... (4.00 / 6)

I'm back!

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet

by Melanchthon on Sun Aug 28th, 2016 at 09:41:12 PM EST
[ Parent ]

Africa fixed? (4.00 / 2)

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sun Aug 28th, 2016 at 11:32:19 PM EST
[ Parent ]

Re: Stiglitz: Reform or Divorce in Europe (4.00 / 3)

It's 3 a.m. at the EU Bar. At a table in this corner sit the EU Haves singing "The Party's Over", while over in that corner the EU Have Nots are singing "Is That All There Is?". And down there at the end of the bar, the UK is all by himself, singing "Show me the Way to Go Home."

by rifek on Tue Aug 30th, 2016 at 01:37:00 PM EST

Stiglitz: Reform or Divorce in Europe | 79 comments (79 topical, 0 editorial, 0 hidden)

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Stiglitz: Reform or Divorce in Europe

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